Retirees see pension tax as attack on middle class

Republican Gov. Rick Snyder is drawing recall threats and angry protests over his attempt to do what no Michigan governor has tried in more than 40 years: Tax the pension and 401(k) incomes of millions of retirees.

The move has brought demonstrators to the Capitol and has thousands of seniors reminding the new governor that they could make re-election difficult for him and lawmakers who go along. Democrats oppose the move, and even some GOP lawmakers are casting about for an alternative to avoid raising taxes on a powerful interest group.

Snyder remains undeterred. The multimillionaire former Gateway computer executive says Michigan _ which has some of the nation's most generous senior tax breaks_ can't afford the $900 million it loses because of them, and that retirees need to pay their share rather than pushing the burden onto younger residents.

Arnold Eick, a 73-year-old former General Motors manager, says he needs those tax breaks to stay afloat. Like many retirees, he's incensed that he and the working poor who would lose a tax credit are being asked to pay more so Snyder can reduce business taxes.

"I just can't understand how anybody can be that unfair, that evil, to take from the poor and give to the rich," Eick said.

Michigan currently charges no income tax on public pensions and exempts up to $45,120 worth of income from private pensions, 401(k)s and IRAs for an individual retiree, with limits of twice that for a retired couple. Treasury figures show about a fifth of the tax returns filed each year include pension income.

Eick says his out-of-pocket health expenses hit $27,000 over a three-year period because GM took away health care for salaried retirees. If the pension exemption also ends, the Flushing resident estimates he and his wife may owe $3,000 in annual income tax _ something he says could make meeting his mortgage payment impossible.

"We're going to have to leave our home," he said while carrying a sign promising retribution. "I'm old but I can recall two things," it said. "1. Tax refunds. 2. You."

Snyder campaigned last year on a promise to replace the complex and unpopular Michigan Business Tax with a 6 percent corporate income tax, a move that would eliminate $1.7 billion in revenue. But he didn't reveal until last month that he wanted to pay for it by requiring more money from individual taxpayers.

The governor has put the business tax cut and pension tax increase into one bill so lawmakers cannot choose between them. But many Republicans see Snyder's plan as violating their pledge not to raise taxes, and some lawmakers are talking about shrinking the size of the business tax cut so they don't have to totally eliminate senior tax breaks.

"I like the governor's business tax, but I don't think seniors should have to pay for it," said GOP Sen. Jack Brandenburg, from a traditionally anti-tax district north of Detroit. "If he puts this in with this business tax (cut), I will not vote for it. . . . It's going to go down."

Snyder says the business tax cuts are needed to help the struggling state add jobs. He argues that Michigan should never have exempted public pensions in the 1960s or eliminated taxes on other retirement income since then. He also wants to eliminate a $2,300-per-person tax break for those 65 and over and reduce the credit seniors get for property tax payments.

Retiree James Baker sees it as an example of efforts by Republican governors like Wisconsin's Scott Walker to attack the middle class and help the businesses that donated to their campaigns. And like many in that state, he's ready to rise up and demand that Michigan's governor back down.

"It's an issue he's using to shift taxes away from businesses," said Baker, 58, who retired in 2009 after working 31 years as a state environmental analyst and who would pay roughly $1,350 in taxes on his annual $32,000 pension. "I do think he's on the same page as Governor Walker."

Mike Martin, a 60-year-old recently retired Treasury worker from Kalamazoo, says he could see taxing a portion of his $39,000 pension _ but not if the money is going to go toward cutting corporate taxes by 86 percent.

Snyder says his plan doesn't hurt low-income retirees. Social Security payments would be exempt from the state's 4.25 percent income tax, and retired couples with $40,000 or less in income wouldn't pay any income tax on their retirement income. Those making more would see their income taxes range from several hundred dollars for those making over $40,000 to several thousand dollars for those with retirement income nearer $100,000.

"The worry that I hear people expressing is that Grandma will have to really skimp while the attorney in the $1,500 suit will get a tax cut. . . . I think that's misleading," said Michigan State University economics professor Charles Ballard. "Under the current law, you could have a senior citizen couple with retirement income well over $100,000 and they pay not a penny of income tax. Whereas the 38-year-old single mom trying to make it as a nurse's aide has a tiny fraction of that and yet she pays income tax."

Snyder says it's unfair to ask other taxpayers to shoulder the cost of services the growing number of seniors need while they pay nothing.

"I think it's a real fair question to say, shouldn't they pay the same amount you and I pay?" he told The Associated Press.

Michigan isn't the only state rethinking senior tax breaks. In Illinois, the Democratic president of the Senate suggested that the state consider taxing the pensions or 401(k) income of wealthier retirees. And Democratic Gov. Neil Abercrombie of Hawaii proposed taxing the pensions of individuals with an adjusted gross income of more than $37,500 and couples receiving more than $75,000. Unhappy seniors persuaded a legislative committee to more than double the limits.

Taking on politically powerful retirees can be a tricky business, said Elizabeth McNichol of the Washington-based Center on Budget and Policy Priorities.

"I don't think it's the worst idea in the world to better target senior tax cuts," she says. "But it needs to be done carefully."